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LONDON (Reuters) - Britain should seek to remain in the European Union's energy market and carbon trading scheme in a transition period if a Brexit deal is not reached in two years, a report by think tank Chatham House said on Wednesday.
Chatham House said the EU and Britain were unlikely to finalise a deal on their future relationship within two years, as is specified by the EU treaty's Article 50.
If a deal is not reached by April 2019, a transitional deal will be needed for up to three years, the European Parliament has said.
In that event, "the government should seek to maintain its current status within the internal energy market (IEM) and the EU's Emissions Trading System (ETS) during the transition process," the report said.
To do so, Britain would need to comply with relevant EU rules on energy, environment and competition and agree to a joint legislative framework for regulatory oversight and enforcement, it added.
Last month, British energy minister Greg Clark said it was in the country's interests to remain part of the IEM, which coordinates access to energy across the EU, and expand interconnectors with other EU and non-EU countries.
The government plans to treble its electricity interconnection capacity by 2025 as it seeks to use more renewable energy and replace ageing coal and nuclear plants.
Interconnectors help minimise the costs of operating low-carbon electricity systems and electricity prices for consumers.
Britain could save several hundred million euros a year from expanding its interconnector capacity with the EU up to the 2020s, according to various estimates.
When Britain leaves the EU it will still be connected to the European market but the extent of its integration is still unclear, Chatham House said.
The best way to ensure continued cooperation with the EU and non EU-members would be to form a new pan-European energy partnership or enlarged European Energy Union.
"In particular, such a partnership could offer a useful platform for aligning EU policies with those of third countries, including the UK, Norway and Switzerland, while allowing them to fully access the IEM and push forward common initiatives," the report said.
It is likely that Britain will have to leave the ETS, which charges power plants and factories for every tonne of carbon dioxide they emit, after Brexit due to the end of the European Court of Justice's jurisdiction over Britain.
However, Britain should try and remain part of the ETS at least until 2020, which marks the end of the current trading period, as setting up a separate scheme would be complicated and expensive, the report said. Britain should also consider the introduction of a carbon tax, it said.
Editing by Susan Fenton